Chesapeake financing review finds no improper benefit to CEO

2/20/2013

Chesapeake financing review finds no improper benefit to CEO

BY SAABIRA CHAUDHURI

OKLAHOMA CITY -- Chesapeake Energy Corp. said a review of financing arrangements involving Chief Executive Aubrey K. McClendon--who is slated to step down by April--found no improper benefit to him and no increased cost to the company.

Last month, Chesapeake said Mr. McClendon, who is also the company's co-founder would retire, and a review of alleged conflicts of interest involving Mr. McClendon found no improper conduct.

The controversy surrounding the executive began in April, after it was revealed that entities controlled by Mr. McClendon had borrowed up to $1.4 billion from private-equity firm EIG Global Energy Partners, which has paid hundreds of millions of dollars for preferred shares in Chesapeake subsidiaries. Some corporate-governance experts said there was the potential for a conflict of interest. Mr. McClendon borrowed the money largely to pay for his share of the drilling costs for wells in which he owns a small interest--investments he acquired through a perk that allowed him to take a small stake in every well Chesapeake drilled. The company and Mr. McClendon in May agreed to end that perk in June 2014.

The latest review focuses on financing arrangements between Mr. McClendon and third parties that have a financial relationship with the company. The company said "millions of pages of documents were collected and reviewed" and more than 50 interviews of Chesapeake and third-party personnel were conducted for the review.

Among the transactions reviewed were the 2008-2012 financing arrangements between EIG Global Energy Partners and affiliates of Mr. McClendon regarding financing of his participation in the Founder Well Participation Program, as well as the preferred stock investments by EIG in CHK Utica LLC and CHK Cleveland-Tonkawa LLC.

"Based on the documents reviewed and interviews conducted, no intentional misconduct by Mr. McClendon or any of the company's management was found by the board concerning these relationships and/or these transactions and issues," Chesapeake said in a statement.

The company also said its board has concluded that the company didn't violate antitrust laws in connection with the acquisition of Michigan oil and gas rights in 2010.

Chesapeake had previously reported that in June that it had received a subpoena from the Antitrust Division of the U.S. Department of Justice, and demands for documents and information from state governmental agencies, investigating possible antitrust violations arising from 2010 leasing activities in Michigan.

Chesapeake said it has been responding to these requests and its board began its own investigation of these allegations.

The latest review also covered other relationships in which both Mr. McClendon and the company conducted business with the same financial institutions, as well as the trading activities of the Heritage Hedge Fund--co-founded by Mr. McClendon--through 2007, when the fund shut down.